Best Buy Rethinks Big-Box Model

This Best Buy store in Richfield, Minn., near the retailer's corporate headquarters, is getting remodeled as part of a pilot project in the Twin Cities and San Antonio, Texas. The new store, part of Best Buy's "connected store" concept, will be smaller and emphasize portable electronics, such as tablets and e-readers.

Black Friday shoppers wait in line outside Best Buy on Nov. 26, 2010, in Fort Worth, Texas. Best Buy will shut down 50 of its large stores while testing new stores that are 20 percent smaller.

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Best Buy is trying to wriggle out of the big box. The electronics retailer has a lot of real estate in its giant blue stores, but it isn't profitable space: In its most recent quarter, the company reported a $1.7 billion loss. So it's shedding stores and workers — and rethinking its big-box concept.

Best Buy's sprawling showrooms full of TVs, digital cameras and video-game consoles once drew people in. But demand for those products has dropped off, and on top of that, the company is up against rivals like Amazon, whose bargain prices and low overhead costs are hard to compete with.

So Best Buy is shifting its strategy.

"We're clearly going to have more doors and less square footage," said CEO Brian Dunn. On a conference call with investors Thursday, he explained how the company is angling for a smaller footprint and a wider range of store sizes.

Best Buy plans to close 50 stores. Dunn said the closures are part of an overall strategy aimed at cutting $800 million in costs and 400 workers.

At the same time, Best Buy is going to expand its portfolio of small stores that sell mobile products. Dunn said it will add 100 new mobile stores into the existing mix.

"These locations have the highest customer-satisfaction scores and are on the path to generate strong financial returns," Dunn said.

He said Best Buy is also going to pilot another store model similar to the big box — but on a diet. It's being tested in two markets — San Antonio, Texas, and Minnesota's Twin Cities.

'Connected' Stores With 'Central Knowledge'

A Best Buy outside Minneapolis, near the company's headquarters, is one of the pilot stores. It will be remodeled and the footprint will shrink. What's inside will change, too.

Best Buy is calling these trimmed-down big boxes "connected" stores. They'll focus more on portable electronics, like e-readers and tablets. And they'll feature a "central knowledge desk" where customers can get stuff like wireless plans for mobile phones. Those kinds of services, along with warranties, are big moneymakers for the retailer.

Frank Tsuchiya, a loyal customer, is optimistic that these strategies will pay off for Best Buy.

"I hope so — just to keep them solvent and good and profitable," he said. "If the product I need isn't here, I'll go somewhere else, but I think it will be here."

But some analysts worry that the changes Best Buy is implementing are coming too late. That's a concern for Morningstar analyst R. J. Hottovy.

"The big question is whether this is going to be enough to offset the competitive pressures the company is facing in the form of a large online player in Amazon, who has a compelling value proposition, and a key vendor in Apple, who continues to build out its own retail stores," Hottovy said.

He said it's good that Best Buy plans to compete more aggressively on price with those foes. But ultimately, he thinks more cost-cutting measures will be necessary to keep the retailer afloat, including additional store closings.

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